This post summarizes my analysis of Allbirds (Ticker symbol: $BIRD). I hope that you enjoy reading it and feel free to add your take and agree/disagree with what's mentioned below.
The post is divided into the following sections:
- Introduction & fundamental analysis of the business
- Historical financial performance
- The problems that the company is facing
- The balance sheet
- Assumptions & valuation
- Valuation based on assumptions different than mine
Introduction & fundamental analysis of the business
Allbirds is one of the companies of which the public's sentiment has shifted significantly, from being seen as an environmentally-friendly company that will disrupt the footwear and apparel market to a company that is questioning whether it can survive the next year or two.
Since November 2021 (the IPO date), the share price is down more than 95%.
Allbirds is selling footwear and apparel, both online and through their 58 stores (as of December 31st, 2022). It is worth mentioning that the products sold are manufactured in Korea, Vietnam, and Peru. This is not uncommon for the competitors as well as the manufacturing is most of the times outsourced in countries where the cost is much lower.
Historical financial performance
Almost in all cases of IPOs, I see the following: The company that goes public has a great story and solid financials for the last few years.
Allbirds was no exception. Its revenue grew 13% in 2019 followed by 27% in 2021 (in the year that the company went public). What followed in 2022 was a growth of only 7%. The growth story was no longer there and it was immediately reflected in the share price. The revenue grew from $194m in 2019 to almost $300m in 2022.
But that's not all.
The gross margin, which averaged around 50%, isn't even close to covering the other operating expenses (SG&A and Marketing) that amounted to:
2019 – 56% of revenue
2020 – 65% of revenue
2021 – 65% of revenue
2022 – 76% of revenue
Normally, as a company grows larger, these types of expenses should decrease as % of revenue. However, not only that they grew, the revenue growth is not sufficient to justify some of these expenses!
The company is losing around $100m/year with no clear path to profitability.
The problems that the company is facing
To make things even worse, the Q4-2022 revenue was 13.4% lower compared to Q4-2021, even though the company had MORE stores.
Wait, that's not all. The management is guiding for 20-28% lower revenue in Q1-2023 vs. Q1-2022!
This is a clear sign that the demand for their products is no longer there at the same level.
The management outlined 4 areas of focus to turn this situation around :
- Reignite product and brand (I personally don't buy this statement at all. I would expect that this is something a company of this kind should always focus on)
- Optimize U.S. stores and slow pace of openings (pretty much admitting their mistake of opening stores too quickly at poor locations. This also includes selectively expanding their 3rd party wholesale channel in the future, which would lead to a lower gross margin per product sold, but less capital required compared to operating their own stores)
- Evaluate transition of international go-to-market strategy (Although their international presence is not that impressive, they're willing to operate through a 3rd party distributor)
- Improve cost-savings and capital efficiency (Same as the first one, using fancy words that people would like to read. Ultimately, their operating expenses should reduce as % of revenue)
The balance sheet
If we take a look at the balance sheet, it is a pretty simple one. The key points to focus on are:
– Cash balance of $167m (Sufficient to survive more than a year if they continue losing $100/year)
– Inventory of $117m
– No debt other than leases
If we take a look at the book value, it is $317m, compared to the current market cap of $158m!
This might seem like an undervalued company based on these metrics, but it isn't that straightforward for two reasons:
- The book value of inventory is likely higher than what anyone would get if it is sold in bulk at once.
- Consider the same company a year down the road with $100m less cash (assuming nothing changes significantly) – The book value would be $217m, much closer to the current market cap. Now consider the book value two years down the road. You know where I am getting at.
This means the market is expecting that the management will burn a lot more cash and drive the value of the company down even more.
Assumptions & valuation
Before I move into this segment, I want to point out that if the company doesn't have a path to profitability, then there is no point in doing a DCF model.
In this part, I intend to show what the company would look like if it is turned around into a profitable one.
So, let's start by answering the question, what is a best-case scenario? Let's look at a few giants in this industry and see how Allbirds compares to them:
| Company | Revenue (in $m) | Gross margin | Operating margin (average of last 5 years) |
|---|---|---|---|
| Allbirds | 298 | 50% | -15.0% |
| Nike | 46,710 | 46% | 14.3% |
| Adidas | 22,444 | 50% | 6.5% |
| Puma | 8,465 | 46% | 7.6% |
| Skechers | 7,445 | 47% | 7.3% |
From a gross margin point of view, Allbirds is at the same level as the rest, they can charge premium prices for their products. However, they cannot move enough volume to become profitable.
The best case scenario would be to come up with amazing products where the demand increases significantly and they can reach an operating margin of 7%. I know it is a stretch but stay with me.
So, here are the assumptions:
- Revenue: -15% for the next year, then recovering with a rate of 10%/year for the next 5 years, after that the growth slows down to 4%. This leads to revenue growth of 73% in 10 years.
- Operating margin: -30% for the next year, slowly improving to breaking even in year 5, then increasing to 7% by year 10.
- Discount rate: WACC-based 11.05% today, decreasing to 9.34% (assuming the company does turn-around)
Under these assumptions, the value of the company is $89 million ($0.6/share).
This is much lower than the current market price of $158 million ($1.06/share)
Valuation based on assumptions different than mine
Let's take a look at how the valuation changes if we use different assumptions (also, under which assumptions the company is fairly valued today).
Below is a table that shows the fair value per share, based on different assumptions related to the revenue 10 years from now as well as the operating margin.
| Revenue / Operating margin | 5% | 7% | 9% | 11% |
|---|---|---|---|---|
| 50% ($447m) | $0.32 | $0.74 | $0.81 | $1.17 |
| 73% ($514m) | $0.30 | $0.60 | $0.84 | $1.31 |
| 100% ($596m) | $0.15 | $0.43 | $0.90 | $1.44 |
| 150% ($745m) | -$0.13 | $0.41 | $1.10 | $1.77 |
At first glance, it might seem that something is wrong with the math. At 5% and 7%, the value decreases as the company is earning more in revenue. There is a fairly simple explanation for this unusual result. At that level of profitability, the company's capital doesn't produce sufficient returns, so discounting the results with the high discount rate, combined with the additional capital tied in inventory, destroys value over time.
That means, for Allbirds to be adding value by growing, the operating margin needs to be above 7%, which is above the giants in the industry (except for Nike).
Although the outcome seems quite bad, there's always a chance that the company gets acquired by a bigger player.
I hope you enjoyed the analysis and feel free to add value by sharing your thoughts and opinions.
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